I wanted to follow up about two pieces that I wrote this week. The first for Bloomberg Views on current Chinese deleveraging attempts and my piece for IAPS from the University of Nottingham on Trump’s China policy framework. As usual start there and come here.
Bloomberg Views Follow Up:
While I have reputation for being a China bear, which I am fine with, I try to simply go where the data leads. It is fair to say that real economic activity was strong in Q3 2016-Q1 2017 but it is also fair to say that was driven by the credit impulse that preceded it by 6-9 months a pretty standard lag for credit to show up in GDP data.
I do believe Beijing is worried about the buildup of debt. It is a poor read of things to posit that Beijing is not worried about the debt buildup. Their is goal is to not become Korea or Thailand. They are fine to become Italy or Japan but they can’t let the whole blow up like the Death Star.
However, just because they are worried about the debt buildup does not mean they understand the “second order” effects of deleveraging that they are going to create. By that I mean, they are significantly worried about becoming Thailand/Korea (which leads to another discussion about how bad are the finances really) so they are pushing down hard on leverage to avoid that. They do not understand however, how reliant coal/steel/real estate/stock prices/land sales/NPLs are on providing lots of liquidity, cheap, easy debt growth going.
Pick almost any major slice of the Chinese economy and ask yourself theoretically what happens if debt isn’t growing 10%+ annually. You would be hard pressed to find significant sectors of the economy that would not suffer significant negative problems with single digit growth.
When I say deal with the “second order” effects of deleveraging I mean, what plan is there once steel consumption falls further, capacity has continued to rise, and prices fall back from WMPs not trading steel products on commodity exchanges? They are unprepared for the legal system to handle bankruptcies, rise in NPLs, employment problems, and the list goes on. Do the same for most major sector creating their own second order list and they simply haven’t thought through those knock on effects.
The key part is that they are roughly 6 weeks into really pushing this across a wide range of debt sectors and the pain would be just beginning. You have to think that Beijing is going to back down and turn the credit spigots flow once again. Commodities are falling like a lead balloon and real estate will be catching up here. If asset prices do not have the buoyancy bestowed from enormously loose credit markets, there will be a major fall across a range of asset classes. Not coincidentally, that is what we have seen in recent history and should expect a lot more if the deleveraging effort continues.
Ultimately, I believe Beijing will backtrack because they have no plan to manage the second order effects.
Trump’s China Framework:
I know I will probably take some heat for this but looking at Trump’s China policies right now it is difficult to point to concrete actions that are outside the realm of relatively traditional US foreign policy. There are three important caveats to this position. First, I am separating actual policies from the Tweeter in Chief. Second, nor does this include aspects like the Kushner family selling visas in Beijing. Third, Trump is a high variance President so for many reasons this could all change quickly.
However, if we look at actual policies implemented and the direction that his policies seem to be moving, it is very difficult to find evidence that he is outside the framework of traditional US foreign policy with China. It is even hard to see currently how anything Trump is doing is a significant break from the Obama or even potential Clinton administration would be pursuing.
Trump is pursuing anti-dumping cases in aluminum and steel against China but the Obama administration was a regular user of these tools and Clinton very likely would have pursued a similar path. Even when Rex Tillerson made his recent announcement about human rights, it seemed more to state what was already executed in practice. Obama had not pushed China on human rights throughout is tenure. Nor is it likely that Clinton would have vigorously pushed the issue with China.
What I do find concerning is the complete lack of staffing that they continue to maintain throughout all levels of the Trump administration. At the same time, the people who are exerting greater influence here are people like Gary Cohn and even yes Jared Kushner who are much more pragmatic. They do not however have any real understanding of China and that does present a long term problem.
I would however note, it is difficult to find major breaks with past policy. He may place greater emphasis on some areas than the Obama administration but the reality is much more mundane than the Tweets.